The purpose of an appraisal is to make sure that an independent non-interested third party verifies the “most likely” sale price based on the market value and condition of the home.

Appraisals are meant to be a realistic determination of the value of a home if it were to sell in the current market, in its current condition.

In addition, appraisers are governed by rules intended to standardize the subjective process of determining a home’s value.

Some of the key factors appraisers look at are: location, above ground size, room count, bathroom count, style of home, condition of property, amenities, and market conditions such as how long it takes for home to sell and if values are increasing, decreasing or steady.

Appraisers are also asked to look only at comparable sales within a certain distance, usually one mile except in rural areas, and within a specified period of time, which is 3 months in the current market.

Listing Prices:

Listing prices on the other hand are influenced by the real estate agent, and set by interested and often emotional sellers.

Sellers are not held by any rules when they list a home. In some cases, sellers take what they paid for the house, add what they have spent on improvements and even add amount for profit.

Often times, sellers will list their home based on the amount needed to pay for the real estate agent, closing costs and cover the amount of the mortgages.

Extra low prices are generally the result of an extra motivated seller that has to sell and move in a rush, so they’ll list their property below market comps in order to be the most competitive.

Throw in bank owned homes (foreclosed properties), and listing prices may be all over the place without a logical explanation due to an asset manager making decisions from another part of the country.

The Verdict:

While list price is never a good indication of what a home in your neighborhood is worth, appraisals are not an exact science that will determine the true value of your home either.

Some will argue that a home is worth what people will pay for it, so there’s obviously a little room for personal interpretation. Either way, the bank securing that piece of real estate for a mortgage loan generally always has the final opinion that matters the most.

Appraisal Myths / Questions:

Not all improvements to the property are equal in producing added value. A local real estate investment club used to tout buying a run-down, roach-infested property cheap, and after de-bugging and adding a fresh coat of paint and carpet – *presto* – the house would appraise like the new homes up the street.

Even with cosmetic repairs, the property may still be much more comparable to the foreclosure next door than the new home a block away. Look first to the “guts” of the property, the electrical, heating & air, etc. If they are updated, then the number of beds/baths and square footage are the next biggest weight, followed by a genuine updating of cosmetic improvements.

“But my home really compares to some of the properties in the neighborhood across the way…”

For example, if a homeowner preparing a house to sell adds $150,000 in upgrades to the kitchen, built-in cabinets and flooring, it may help the property show better in an open house and in magazine advertisements.

However, the seller might still be stuck with a $450,000 appraised value like the three comparable properties on their street vs the $750,000 they were hoping to list it for.

Even though the neighborhood across the main street had similar homes in the higher price range, especially after the seller’s extensive upgrades, appraisers will always use homes from the actual neighborhood to establish value first.

So basically, the seller simply over-improved their home for their specific neighborhood.

“This appraiser included foreclosures as comps – that’s not fair”

It isn’t fair, especially if your home is well-kept and in great condition compared to the run-down foreclosures in the neighborhood.

Unfortunately, if every recent sale, or nearly all sales, are foreclosures at reduced prices, then the appraiser is forced to use the recent sales and trends as comparable values. High foreclosure rates generally depress values and show a trend of lowering prices.

And abnormally high foreclosure rates generally depress values and show a trend of constantly lowering value.

“But I just put in a $50K pool, doesn’t that count for anything?”

Pools and professional landscaping rarely see a dollar for dollar value add on a property. The value is going to mainly be based on comparable sales in a neighborhood.

“How can similar homes in the same neighborhood appraiser for such different values?”

This is a typical question for older neighborhoods where similar models may have drastic price differences.

Additional rooms and square footage can be the main reason for one property appraising higher than another.

Keep in mind, just because the market trend in a particular neighborhood is improving over time, the individual properties need to meet the same conditional improvements as the others in order rise with the tide.

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An appraiser is looking at several things when determining the value of a property: improvements, size and square footage of the living area, neighborhood amenities, location and the market trends around the area.

Private Mortgage Insurance (PMI) is insurance payable to a lender or trustee for a pool of securities that may be required when taking out a mortgage loan.

It is insurance to offset losses in the case where a mortgagor is not able to repay the loan and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property.

PMI isn’t necessarily a bad thing since it allows borrowers to purchase a property by qualifying for conventional financing with a lower down payment.

Private Mortgage Insurance (PMI) simply protects your lender against non-payment should you default on your loan. It’s important to understand that the primary and only real purpose for mortgage insurance is to protect your lender—not you. As the buyer of this coverage, you’re paying the premiums so that your lender is protected. PMI is often required by lenders due to the higher level of default risk that’s associated with low down payment loans. Consequently, its sole and only benefit to you is a lower down payment mortgage

Private Mortgage Insurance and Mortgage Protection Insurance

Private mortgage insurance and mortgage protection insurance are often confused.

Though they sound similar, they’re two totally different types of insurance products that should never be construed as substitutes for each other.

Mortgage protection insurance is essentially a life insurance policy designed to pay off your mortgage in the event of your death.

Private mortgage insurance protects your lender, allowing you to finance a home with a smaller down-payment.

Automatic Termination

Thanks to The Homeowner’s Protection Act (HPA) of 1998, borrowers have the right to request private mortgage insurance cancellation when they reach a 20 percent equity in their mortgage. What’s more, lenders are required to automatically cancel PMI coverage when a 78 percent Loan-to-Value is reached.

Some exceptions to these provisions, such as liens on property or not keeping up with payments, may require further PMI coverage.

Also, in many instances your PMI premium is often tax deductible in a similar fashion as the interest paid each year on your mortgage is tax deductible. Please, check with a tax expert to learn your tax options.

Three Types of Occupancy:

According to HUD, a principal residence is a property that will be occupied by the borrower for the majority of the calendar year.

At least one borrower must occupy the property and sign the security instrument and the mortgage note for the property to be considered owner-occupied.

Second Home -

To qualify as a second home, the property typically must be at least 50 miles from the primary residence, and it cannot appear that the real estate is being purchased for rental investment purposes.

Investment Property -

A property that is not occupied by the owner and is typically utilized for rental income purposes.

Down Payment Requirements:

Owner Occupied / Primary Residence -

Purchases for VA and USDA can go up to 100% financing, while FHA requires 3.5% of the purchase price as a down payment. Conventional financing may require anywhere from 5% – 25% depending on the credit score, county, property type and loan amount.

Second Home -

Average 10% down for a purchase, and 25% equity for a refinance.

Investment Property -

Down payment requirements will range from 20-25% depending on the number of units. When doing a cash-out refinance on an investment property with 2-4 units, the required loan to value will need to be 70% or lower to qualify.

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*It should be noted that on any high balance loan amount the above mentioned Loan-to-Value (LTV) requirements will change. Credit score requirements also apply.